Massive Rolling Top Formation on the S&P500

Due to a sudden burst on Friday, the last trading day of the week, the S&P500 managed to avoid recording another losing week, but just barely—it gained a mere 0.28% on light volume. Volatility ticked up, however, just slightly; but the VIX index remains in the super complacent zone based on long-term historical ranges.

On the US economic front, the week got off to a poor start with the Empire State Manufacturing Survey registering a disastrous reading of -9, when instead it was expected to come in at a positive 7 reading. The housing market index also disappointed. Consumer prices, the headline figure, came in slightly hotter than expected. Initial jobless claims also notched a disappointing result.  The Philly Fed business outlook survey recorded a negative print, when instead it was supposed to come in with a positive result. There were a few better than expected reports—industrial production beat consensus estimates, and existing home sales were also slightly stronger than economists predicted.

In the short-term, technical analysis of the daily charts continue to point to a stock market that’s poised to drop meaningfully. Last week’s tiny gain did nothing to change this view.

More troubling is the longer term picture. When the S&P500 is viewed over say 10 years using weekly bars, a very distinct topping formation comes into clear view. This formation began to take shape at the beginning of 2015, so it’s now almost one and a half years old. But based on long-term historical analysis, longer duration patterns tend to be more reliable than similar patterns that occur on shorter time frames, say daily or hourly intervals.

So we not only see a massive rolling top continue to develop, but we also see this top advancing in age. In other words, for this rolling top pattern to stay in effect, a meaningful drop in the markets must occur sometime this year. If it doesn’t, then this topping pattern will have failed. That means that just in the next several months (given that June is around the corner), we will be able to see if this huge topping formation was in fact accurately foreshadowing a drop in the US stock markets.

Will the “sell in May and go away” mantra uses by many Wall Street experts turn out to be especially meaningful in 2016?

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